Small cap investments don’t get much attention, but they may have a place in your portfolio.
Many experts on Wall Street and in the media pay little attention to small cap stocks. They’re smaller, more obscure companies. They don’t usually involve large sums of money, and they aren’t as glamorous as the bigger caps available to invest in today.
But some experts have argued that the lack of attention to small caps is unwarranted. They believe small caps offer much more opportunity for growth. Of course, along with increased opportunity for growth comes increased opportunity for loss. Consider both sides when deciding if small caps might have a place in your portfolio.
Small cap stocks are a nickname for stocks of companies that typically have a small market capitalization. (They usually range between $250 million and $2 billion, but definitions vary.) Market capitalization, simply put, is the price of the company’s stock multiplied by the number of shares outstanding. It’s basically the value the market places on a company.
Large caps are more attractive to some experts, because they are perceived to be more reliable and safer. The prevailing assumption is blue chip stocks are strong and steady. But that isn’t always the case; risk exists throughout the market. On the flip side, reduced growth potential often accompanies reduced risk. Wal-Mart started as a small cap stock before becoming the world’s largest retailer. It may not have taken a stock like Wal-Mart long to double in growth, but for them to do so now, as a large cap stock, would be almost inconceivable. On the other hand, a small cap’s biggest advantage and disadvantage is its potential to change dramatically.
You should exercise caution when investing in small caps. Any money you invest in them should be money you’re prepared to expose to a higher degree of risk. Small companies often have narrower markets and limited financial resources, so these stocks do present more risk than larger, more established companies. Small cap stocks are also more difficult to research because of their obscurity. Consequently, you and your financial professional will need to devote more time and effort to investigating them.
This is a niche individual investors may want to consider. If an investor gets in at the ground level, the opportunity for growth exists if larger, institutional investors later pick the same stock and buy a great deal of shares.
Wall Street and the media may not pay attention to small cap stocks, but that doesn’t mean they aren’t a possible addition to your portfolio. Because of their relative obscurity in the markets today, they may provide the potential for a great deal of growth along with their increased risks. But every investment decision, including small cap investments, should be carefully considered with a professional to make certain it aligns with your financial goals.